King County v. Ikb Deutsche Industriebank Ag

Decision Date26 April 2010
Docket Number09 Civ. 8822(SAS).,No. 09 Civ. 8387(SAS),09 Civ. 8387(SAS)
PartiesKING COUNTY, WASHINGTON, Individually and on Behalf of All Others Similarly Situated, Plaintiff,v.IKB DEUTSCHE INDUSTRIEBANK AG, et al., Defendants.Iowa Student Loan Liquidity Corporation, Individually and on Behalf of All Others Similarly Situated, Plaintiff,v.IKB Deutsche Industriebank AG, et al., Defendants.
CourtU.S. District Court — Southern District of New York

708 F.Supp.2d 334

KING COUNTY, WASHINGTON, Individually and on Behalf of All Others Similarly Situated, Plaintiff,
v.
IKB DEUTSCHE INDUSTRIEBANK AG, et al., Defendants.

Iowa Student Loan Liquidity Corporation, Individually and on Behalf of All Others Similarly Situated, Plaintiff,
v.
IKB Deutsche Industriebank AG, et al., Defendants.

Nos. 09 Civ. 8387(SAS), 09 Civ. 8822(SAS).

United States District Court,
S.D. New York.

April 26, 2010.


708 F.Supp.2d 335
Anne L. Box, Esq., Daniel S. Drosman, Esq., David C. Walton, Esq., Jessica T. Shinnefield, Esq., Luke O. Brooks, Esq., Nathan R. Lindell, Esq., Patrick J. Coughlin, Esq., Christina A. Royce, Esq., Darryl J. Alvarado, Esq., Robbins Geller Rudman & Dowd LLP, San Diego, CA, Samuel H. Rudman, Esq., Jarrett S. Charo, Esq., David A. Rosenfeld, Esq., Robert M. Rothman, Esq., Robbins Geller Rudman & Dowd LLP, Melville, NY, Jason C. Davis, Esq., Robbins Geller Rudman & Dowd LLP, San Francisco, CA, for Plaintiffs.

John D. McFerrin-Clancy, Esq., Lowenstein Sandler PC, New York, NY, Thomas E. Redburn, Jr., Esq., Lowenstein Sandler PC, Roseland, NJ, for Defendants, IKB Deutsche Industriebank AG and IKB Credit Asset Management, GmbH.

James J. Coster, Esq., Aaron M. Zeisler, Esq., James J. Regan, Esq., Joshua M. Rubins, Esq., Justin E. Klein, Esq., Satterlee Stephens Burke & Burke LLP, New York, NY, for Defendants Moody's Investors Service Limited and Moody's Investors Service, Inc.

Adam N. Zurofsky, Esq., Andrea R. Butler, Esq., Brian T Markley, Esq., Dean I. Ringel, Esq., Floyd Abrams, Esq., Jason M. Hall, Esq., Cahill Gordon & Reindel LLP, New York, NY, for Defendant The McGraw Hill Companies, Inc. d/b/a Standard & Poor's Rating Services.

Andrew J. Ehrlich, Esq., Martin Flumenbaum, Esq., Roberta A. Kaplan, Esq., Tobias J. Stem, Esq., Paul, Weiss, Rifkind, Wharton & Garrison LLP, New York, NY, for Defendant Fitch, Inc.

Thomas S. Wiswall, Esq., Phillips Lytle LLP, Rochester, NY, for Defendant Stefan Ortseifen.
OPINION AND ORDER
SHIRA A. SCHEINDLIN, District Judge.
I. INTRODUCTION

Two institutional investors, King County, Washington and Iowa Student Loan

708 F.Supp.2d 336
Liquidity Corporation (“ISL”), bring these putative class actions for common law fraud in connection with the collapse of Rhinebridge, a structured investment vehicle (“SIV”). Plaintiffs sue six corporate entities and two individuals: IKB Deutsche Industriebank AG and IKB Credit Asset Management, GmbH (together, “IKB”); The McGraw Hill Companies, Inc. d/b/a Standard & Poor's Rating Services (“S & P”); Moody's Investors Service, Inc. and Moody's Investors Service Ltd. (together, “Moody's”); Fitch, Inc. (“Fitch,” and, with S & P and Moody's, the “Rating Agencies”); Winfried Reinke and Stefan Ortseifen (collectively, “defendants”).

Characterizing Rhinebridge as “the shortest-lived ‘Triple A’ investment fund in the history of corporate finance,” plaintiffs claim that between June 1, 2007 and October 18, 2007, defendants fraudulently misrepresented the value of Rhinebridge and its senior debt securities (the “Senior Notes” or “Notes”). 1 These misrepresentations took the form of the high credit ratings assigned to the Notes by the Rating Agencies (the “Ratings”).2 In addition to jurisdictional issues raised by IKB and Ortseifen, defendants 3 move to dismiss the Complaints under Rule 12(b)(6) of the Federal Rules of Civil Procedure. This opinion and order addresses only the issues raised jointly by S & P and Moody's.4 The issues raised by Fitch, IKB, and Ortseifen will be addressed in separate rulings. For the reasons discussed below, S & P and Moody's motion is denied.


II. BACKGROUND5

On or about June 27, 2007,6 the Rating Agencies, along with the transaction sponsor,

708 F.Supp.2d 337
IKB, and its officers, Reinke and Ortseifen, collaborated to produce and rate Rhinebridge's Senior Notes.7 The Rating Agencies gave the Senior Notes their “Top Ratings” and rated them “Triple A.” 8 Top Ratings like those issued on Rhinebridge's Senior Notes conveyed to investors that the Notes were highly credit worthy, that Rhinebridge's ability to meet its financial commitments was exceptionally strong, and that the Senior Notes were nearly as safe and secure as United States Treasury Bills backed by the full faith and credit of the United States Government.9

In fact, these Ratings concealed that Rhinebridge's portfolio actually consisted of toxic assets that were heavily concentrated in the structured finance and subprime mortgage industries and thus likely to default.10 Only four months after the Senior Notes were issued with Triple A Ratings, on October 18 and 19, 2007, the Rating Agencies abruptly downgraded the Notes to “junk” status.11 The downgrades revealed the problems with Rhinebridge's constituent assets and its lack of sufficient capital.12 The SIV was stripped of its short-term funding ability and the Senior Notes went from having a probability of default of approximately zero to approximately one hundred percent in less than four months.13 Rhinebridge unraveled in a matter of days and entered receivership on October 22, 2007.14 The Senior Notes correspondingly collapsed in value and investors suffered millions of dollars in damages as a result.15


III. APPLICABLE LAWA. Rule 12(b)(6) Motion to Dismiss

In deciding a motion to dismiss pursuant to Rule 12(b)(6), the court must “accept as true all of the factual allegations contained in the complaint” 16 and “draw all reasonable inferences in [the] plaintiff [s'] favor.” 17 However, the court need not accord “[l]egal conclusions, deductions or opinions couched as factual allegations ... a presumption of truthfulness.” 18 To survive a Rule 12(b)(6) motion to dismiss, the allegations in the complaint must meet a standard of “plausibility.” 19 A claim is facially plausible “when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” 20 Plausibility “is not akin to a probability requirement,” rather plausibility requires “more than a sheer possibility that a defendant has acted unlawfully.” 21

708 F.Supp.2d 338

When determining the sufficiency of a claim under Rule 12(b)(6), the court is normally required to consider only the allegations in the complaint. However, the court is allowed to consider documents outside the pleading if the documents are integral to the pleading or subject to judicial notice.22


B. Common Law Fraud
1. The Elements

“Under New York law, to state a claim for fraud a plaintiff must demonstrate: (1) a misrepresentation or omission of material fact; (2) which the defendant knew to be false; (3) which the defendant made with the intention of inducing reliance; (4) upon which the plaintiff reasonably relied; and (5) which caused injury to the plaintiff.” 23 Because the elements of common law fraud under New York law are “substantially identical to those governing Section 10(b) [of the Securities and Exchange Act of 1934], the identical analysis applies.” 24

With regard to the causation element of a common law fraud claim, a complaint must “provide a defendant with some indication of the loss and the causal connection that the plaintiff has in mind.” 25 “[A] misstatement or omission is the ‘proximate cause’ of an investment loss if the risk that caused the loss was within the zone of risk concealed by the misrepresentations and omissions alleged by a disappointed investor.” 26 “The zone of risk is determined by the purposes of the securities laws, i.e., ‘to make sure that buyers of securities get what they think they are getting.’ ” 27 “Central to the notion of proximate cause is the idea that a person is not liable to all those who may have been injured by his conduct, but only to those with respect to whom his acts were ‘a substantial factor in the sequence of responsible causation,’ and whose injury was ‘reasonably foreseeable or anticipated as a natural consequence.’ ” 28

708 F.Supp.2d 339

Plaintiffs need not demonstrate that defendants' misstatements or omissions caused all of plaintiffs' losses. Rather, plaintiffs need only allege “facts that would allow a factfinder to ascribe some rough proportion of the whole loss to [the defendant's alleged] misstatements.” 29

2. Pleading Loss Causation

Complaints alleging fraud must plead the misstatement or omission with particularity pursuant to Rule 9(b) of the Federal Rules of Civil Procedure.30 However, plaintiffs need only meet the lesser Rule 8(a) standard when pleading loss causation.31 Under Rule 8(a)(2), a pleading must contain only “a short and plain statement of the claim showing that the pleader is entitled to relief.” 32

As applied to loss causation, the Supreme Court has made clear that even when applying Rule 8(a), “something beyond the mere possibility of loss causation must be alleged....” 33 While Rule 8(a) “marks a notable and generous departure from the hyper-technical, code-pleading regime of a prior era, [ ] it does not unlock the doors of discovery for a plaintiff armed with nothing more than conclusions.” 34 Therefore, this standard “demands more than an unadorned, the-defendant-unlawfully-harmed-me accusation.” 35


IV. DISCUSSION

Plaintiffs have adequately pleaded that the misleading ratings, and the eventual corrective disclosure, proximately caused plaintiffs' losses. The Top Ratings conveyed to investors that the Rhinebridge Senior Notes were as safe and secure as United States Treasury Bills.36 These Ratings concealed the risk that Rhinebridge was comprised of billions of dollars of toxic assets and thus likely to default.37

708 F.Supp.2d 340
The risk materialized when the Rating Agencies abruptly downgraded the Senior Notes to “junk” status on October 18 and 19, 2007.38 When investors learned that Rhinebridge was invested in these toxic assets and was likely to default, Rhinebridge lost its ability to obtain funding.39 Three days later, Rhinebridge entered receivership and the Senior Notes...

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